Answer:
a, 15%
b, 150,000
c, $ 3.30
d, = $3,333,333.33
e, $3,833,333.33
Explanation:
To solve this,
Note that we have been given a similar venture to compare to our venture.
The total shareholder's equity for the other venture (P) = $10,000,000 and the net income (E) = $1,000,000
Hence, Price/Earnings (P/E) for other venture = 10,000,000/1,000,000 = 10.0
Now for our venture, Earnings in the 5th year = $500,000
Assuming that P/E ratio for both the ventures to be equal, P/500,000 = 10.0
hence, total shareholder's value for our venture = $5,000,000 --------------- (1)
Now the investor invested $500,000 and expected 50% return after 5 years, hence the investor's value after 5 years would be equal to 500,000 * (1+50%) = $750,000 --------------- (2)
Now percent ownership of venture given to investor = (Value of investor's investment after 5 years/total value of all shareholders after 5 years)
Hence, divide (2) by (1)
percent ownership of venture given to investor = 750,000/5,000,000 = 0.15
or 15%
Therefore Answer to part 'a' is = 15%
Part (b) :For the percentage ownership given to new investor = 15%, total number of shares = 1,000,000
Hence, number of shares issued to new investor = 15% x 1,000,000 = 150,000
Hence, answer to part b = 150,000
Part (c): Amount invested by new investor = $500,000 and number of shares issued to him = 150,000
hence issue price of share = Amount invested / Number of shares issued
= 500,000/150,000 = $3.33
Hence, issue price per share = $3.33
Part (d):
The Pre money valuation is the value of the company before any external funding. In this case, the number of shares held with the founders before the new investor = 1,000,000 and the equity price = $3.33
hence, Value of the venture = 3.33 * 1,000,000 = $3,333,333.33
Hence, pre money valuation of the venture = $3,333,333.33
Part (e): Post money valuation of a company is the value of the company after external funding. In this case, investor invests $500,000 to the venture increasing the value of the company by the same amount.
Hence post money valuation = pre money valuation + Investment
= 3,333,333.33 + 500,000
= 3,833,333.33
Hence, post-money valuation of the venture = $3,833,333.33
